Top VCs explain why you should start your business in Hong Kong

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It’s easy to launch a business in Hong Kong, but ridiculously high cost of living and lack of government support are the main challenges

There is no doubt that Hong Kong is one of the best cities in Asia to start a business. With its close proximity to manufacturing hub Shenzhen, Hong Kong sits within a four-hour flight to nearly every destination in the region. The city’s large English-speaking population also makes it an attractive place to settle and, to top it off, Hong Kong has no capital gains tax and one of the lowest corporate tax rates in the world at just 16.5 percent.

However, there are a number of challenges Hong Kong faces particularly with the rapid emergence of competing ecosystems around the region. One of the largest complaints regarding the city is . And while the ecosystem has grown by leaps and bounds over the last five years, challenges still arise due to a lack of early-stage investor education and talent retention. (Every good startup essentially leaves once they get traction.)

I asked some of Hong Kong’s most prominent venture capitalists what they thought of the city’s future. Here are three reasons why you shouldn’t give up on Hong Kong just yet.

Survival of the fittest

Two of the largest gripes that startup founders have about doing business in Hong Kong is the lack of government support and the high cost of living, namely rent.

When compared with Singapore, the city provides virtually no financial support for startups other than the Innovation and Technology Venture Fund worth US$257 million (or HK$2 billion), which is still far less than the Singapore government’s investments in total. The details of how this money will be deployed by the government are also vague at best.

David Chang, founder and managing partner of MindWorks Ventures, is one of the stars in the Hong Kong venture capital scene. The way David sees it, these two deterrents are actually strengths of the overall ecosystem when viewed from the right perspective.

“Hong Kong’s ecosystem is less crowded than Singapore. Getting too much support from the government is not a good thing […] [because] bad founders and bad business models are getting funded left and right. A lot of early-stage companies get stuck in a limbo stage where they are unable to raise a big round because their business model just doesn’t work. And VC’s get overcrowded with proposals.”

Because there is little to no government support in the city, a company must figure out how to aggressively grow their numbers and their top line from day one. This provides a natural filter allowing only the strongest companies to survive.

The same principle applies to the rising cost of living. High rent in Hong Kong forces a process of natural selection for startup companies. The last thing startup investors want to see is their money squandered on rent.

A steady inflow of talent

Hong Kong has always been a transient city due to its proximity to China and status as a financial hub. Expatriates come and go often which provides a constant pipeline of industry talent.

Tytus Michalski is a managing partner of Fresco Capital, a venture capital firm that invests in early-stage startups around the world. He is an active supporter of the startup ecosystem in Hong Kong and serves the community through mentorship and education.

“As the ecosystems in Asia become more mature over the next 10 years, over the long term, we definitely see more of our portfolio companies being headquartered in Asia and going global […]. We do think there’s going to be a shift. There’s been a huge amount of progress in Hong Kong. I would say that it really started to accelerate about 5 to 6 years ago.”

When it comes to building a proper ecosystem, Tytus ultimately believes that the most important element is talent.

“Hong Kong’s been fortunate in that there’s been a pretty interesting inflow of talent from other parts of the world and that’s been helpful for the ecosystem because that can accelerate the process. So to the extent that Hong Kong can remain relatively open to bringing in talent, I think that’s very positive.”

The private sector paves the way

More than the lack of government support, one of the criticisms the city often receives is the lack of support from the private sector. It is well-known that much of the private wealth in Hong Kong was created in the property market. As the ecosystem matures, early-stage investing will be gradually accepted as an asset class. However, this takes time.

Alan Chan is the managing partner of Vectr Ventures, another one of Hong Kong’s venture capital firms. In Alan’s opinion, what is perceived as one of the city’s weaknesses is actually a strength, and a true ecosystem can only be built slowly over time.

“I personally am a strong believer of the private sector and the private sector driving business, innovation, and driving things forward. The perils of having the private sector driving [these] things forward are [that] it goes slower, people are more cautious, and it takes time.”

The silver lining is that for startups to attract investment from the private sector, they are required to level up their game. Hong Kong as an ecosystem comes with its own set of nuances, and founders have quickly realized that copycat ideas from the West don’t always enjoy the same level of success locally.

“We’ve seen a lot more companies now directly tackling a problem and building a product out of their own insights and experiences. Hong Kong doesn’t have the same issues that the Bay Area has. What is really comforting and inspiring to see is that founders are reaching and wanting to solve a problem. That’s been a nice progression over the years.”

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Jay Kim is a Hong Kong-based investor, author and host of the popular podcast, The Jay Kim Show which educates aspiring entrepreneurs, investors, and startup founders through interviews with top global business leaders. Subscribe via iTunes and feel free to reach out directly to Jay on Twitter @jaykimmer.

The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, submit your post here.